Thematic review: FIN-FSA calls attention to the clarity of investment funds’ sustainability disclosures and the role of risk management in monitoring sustainability risks
In 2023–2024, the Financial Supervisory Authority (FIN-FSA) has conducted a two-part thematic review about the integration of sustainability risks in UCITS and non-UCITS funds (hereinafter also “investment funds”) and their sustainability disclosures.
The thematic review covered all Finnish management companies and alternative investment fund managers managing non-UCITS funds (hereinafter, also “companies”), examining how greenwashing risks and sustainability risks are considered in investment funds managed by them. In addition, the FIN-FSA sent a more extensive survey on the same theme to eight companies. The thematic review is part of a Common Supervisory Action (CSA) coordinated by the European Securities and Markets Authority (ESMA).
This second part of the thematic review examines how sustainability risks are being integrated the organisation of activities of the companies, and how the companies adhere to company- and fund-level disclosure obligations pertaining to sustainable finance in practice. The findings of the first part of the thematic review, i.e., the prevention of greenwashing risk, were published in March 20241.
Key findings of the second part of the thematic review:
- Descriptions of the integration of sustainability risks in the investment decision-making process both at the company level (SFDR2, Article 3) and fund level (SFDR, Article 6) were incomplete.
- The companies’ internal descriptions of the allocation of responsibilities and reporting lines did not crystallise the role of the risk management function in the integration of sustainability risks into the investment decision-making process.
- Some of the companies did not discuss sustainability risks on its board of directors.
- The companies’ risk management policies did not describe the integration of sustainability risks comprehensively enough.
- Some of the companies had not published a statement of principal adverse impacts on sustainability factors (PAI statement) at the company level.
- Investment funds under Articles 8 and 9 of the SFDR were found to have qualitative shortcomings in terms of sustainability disclosures. The disclosures for all of the investment funds under review were not clear, concise without repeating the same information, detailed and accurate. Furthermore, the information provided under the SFDR regulatory framework in a template format (pre-contractual and periodic) was not consistent across the templates.
- Some of the investment funds were found to monitor and report on sustainability factors in connection with the integration of sustainability risks even where they did not have the promotion of sustainability characteristics under the SFDR or sustainable investment as their objective. This may give misleading information to investors about the objectives of the investment fund and increase the risk of greenwashing.
The FIN-FSA finds it important that sustainability disclosures on investment funds to investors are clear.
Disclosures made to investors must be accurate, consistent, justifiable and supported by facts. Repeating the same information unnecessarily is not appropriate. Descriptions that are too generic and unclear do meet the requirement of regulatory disclosures to investors, either.
Description of the organisation of companies’ activities and their procedures must clearly highlight the supervisory role of the risk management function in the investment decision-making process.
The risk management function of the company must at least verify and supervise sustainability risk reviews performed by other personnel. Risk management policies and internal guidelines must include descriptions and procedures about the integration of sustainability risks and the roles of the personnel responsible for sustainability risks. In the FIN-FSA’s view, the risk management function must report on sustainability risks on a regular, at least quarterly, basis to the board of directors and executive management of the management company. The criteria, findings and the FIN-FSA's views are described in more detail in the attached report.
Follow-up on the thematic review
The eight companies subject to the thematic review will be sent letters including the FIN-FSA’s findings and a recommendation to take action to remediate the shortcomings identified. The FIN-FSA has also required that the boards of directors of the companies review the FIN-FSA’s findings and adopt an action plan for the company to remediate the shortcomings. The FIN-FSA will review the actions by the companies and monitor their progress.
The FIN-FSA also urges all management companies and AIFMs to consider the FIN-FSA's findings and views, as applicable, with respect to sustainability risks and sustainability-related disclosure obligations.
For further information, please contact
- Anna Mäkipeska, anna.makipeska(at)fiva.fi
- Nina Männynmäki, nina.mannynmaki(at)fiva.fi
- Riitta Seppä, riitta.seppa(at).fi
Appendix
1https://www.finanssivalvonta.fi/en/publications-and-press-releases/supervision-releases/2024/thematic-review-greenwashing-risk-taken-into-account-in-a-relatively-limited-manner-in-investment-fund-activities/
2Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability‐related disclosures in the financial services sector (hereinafter the “SFDR”)